Documenting an acquisition....

[Guest A_Dude]

We have a company with a 401(k) plan that was acquired by another firm mid year that only maintained a Profit Sharing plan. Right after the acquisition, the purchasing company immediately made payroll changes stopping deferrals and loan payments. They originally were going to shut down the plan, but now have decided they will keep the plan. They have just resumed payroll repayment of loans to prevent participants from defaulting, and will be resumming deferrals probably. What kind of documentation should we get for the 401(k) plan?

I cannot think of anything besides putting some notes in the file. Did they violated something by stopping deferral and loan payments for a period?

Anyone ever experience this?

[ETA Consulting LLC]

They violated the particpants' elections to defer into the plan. Those should not have been stopped until the plan was actually terminated. A simple amendment to terminate could've accomplished that. But to take a unilateral action to deny participants rights to defer under a written plan appears to be a violation (like putting the cart before the horse).

Good Luck!

[QDROphile]

Document the action as plan amendments with the appropriate effective dates for cessation of deferrals and loan payments and restarting deferrals and loan payments. The loan payment part is most troubling. This assumes everything happened within a year and rthe amendments are adopted before the end of the year. The plan terms should reflect what happened, which is the other side of the coin of the plan should operate in accordance with its terms. I hope that that the new owner is donig some sort of pennance.

[MoJo]

What kind of documentation should we get for the 401(k) plan?

I cannot think of anything besides putting some notes in the file. Did they violated something by stopping deferral and loan payments for a period?

Anyone ever experience this?

Without trying to be snide, the documentation I would get is an attorney's engagement letter. Unless the plan was amended to 1) suspend deferrals, and 2) limit participation (i.e. not include the employees of the acquirer) there are missed opportunities (for at least the existing participants if not the acquirer's employees) and breaches of fiduciary duties by ceasing loan repayments (without other payment arrangements being made).

[MoJo]

Document the action as plan amendments with the appropriate effective dates for cessation of deferrals and loan payments and restarting deferrals and loan payments. The loan payment part is most troubling. This assumes everything happened within a year and rthe amendments are adopted before the end of the year. The plan terms should reflect what happened, which is the other side of the coin of the plan should operate in accordance with its terms. I hope that that the new owner is donig some sort of pennance.

With all due respect, those are amendments that can not be made retroactively. Either they already exist (which doesn't seem to be the case) or doing so would actually be a bigger problem. I often recommend that plan sponsors search for appropriate documentation to indicate an amendment was made (Board minutes, letters, emails, or what ever), but if it doesn't already exist, it can't be "created" retroactively.

[Kevin C]

Was the acquisition a stock purchase or an asset purchase?

[Guest A_Dude]

From what I can tell it was an stock purchase transaction. They are operating the acquired company seperately (but I honestly have no way of knowing if this true). All this happened out of the blue, and the acquiring firm apparently had no idea they had a 401(k) plan. We drafted a termination amendment for them, but the new owner refused to sign it. He didn't want to responsibilty, even though he wanted the plan gone and was the only one with authority to sign it.

They did have to change their payroll, and they also at least notified employees that they would have make arrangements to pay the loans back on their own.

[QDROphile]

Mojo: What were the changes if they were not amendments? I am willing to bet the that changes were dictated by a person with amendment authority or that person's agent. You are correct that the amendments may not have been conducted in accordance with the prescribed procedures for amending the plan and one hopes to cobble together enough communications to resemble whatever the plan requires to avoid questions about effectiveness. What is to be done if the amendments were not effective is a different question than how to document what was done. The question was about documenting the events.

[david rigby]

If the "old" plan had a matching feature, that does not disappear. Nor does ADP testing. Nor does TH testing.

[MoJo]

Mojo: What were the changes if they were not amendments? I am willing to bet the that changes were dictated by a person with amendment authority or that person's agent. You are correct that the amendments may not have been conducted in accordance with the prescribed procedures for amending the plan and one hopes to cobble together enough communications to resemble whatever the plan requires to avoid questions about effectiveness. What is to be done if the amendments were not effective is a different question than how to document what was done. The question was about documenting the events.

Just "saying something is changing" does not constitute an amendment. One of the fundamental requirements of ERISA is that the plan be IN WRITING - and that implies a formality to changes made, so that the terms of the plan can be ascertained from within the "four corners of the document" (or documents - as it need not be a single document). If the company simply ceased deferrals without any "writing" that can be construed as part and parcel of the WRITTEN plan document(s), it fails. It's as simple as that.

We've seen plan sponsor do this many times, and then pay for it either when the plan is audited, or (for the smart ones) who correct through VCP (which generally involves making a missed opportunity contribution pursuant to the EPCRS program). I have three VCP filings with such missed opportunity issues (plan changed in operation without appropriate documentation) pending right now.

My response is that you CANNOT now create documents that will suffice as "amendments" to the plan in order to correct this scenario. You must go back and operate the plan as WRITTEN, making changes only prospectively, as desired.

[QDROphile]

You are aware that the IRS allows documentation of amendments effective mid-year if the amendment document is adopted by the end of the year with a retroactve effective date.

[MoJo]

You are aware that the IRS allows documentation of amendments effective mid-year if the amendment document is adopted by the end of the year with a retroactve effective date.

Yes, but generally only for those things that do not affect an accrued benefit. Retroactively suspending contributions does NOT rectify a missed opportunity - which is accrued with each paycheck for which deferrals are suspended. Look it up. EPCRS has a specific remedy for that violation - and it involves making a contribution to rectify the problem - not adoption of a retroactive amendment.

There are lots of things that can't be "adopted" retroactively. In fact, the general rule is that you can't, but there are exceptions where you can. Not the other way around.

[Kevin C]

"Asset or stock purchase?" is my standard initial question when a sale or acquisition is under discussion. Since you don't know which is was, no one can tell you for certain what should have been done.

If it was an asset purchase, the OP company's action of immediately stopping deferrals and loan payments was proper. The employees are no longer employed by the plan sponsor and their new employer had not adopted their prior employer's plan. If the asset purchaser later decides to adopt the other company's plan, then they start deferrals and loan payments again. We had that situation happen with a client that went bankrupt. The company that bought their assets decided a couple of months after the purchase to adopt the old plan.

If it was a stock purchase, then as mentioned stopping deferrals without amending or terminating the plan is a problem. With a stock purchase, the purchaser becomes the plan sponsor unless the plan is terminated prior to the sale.

[QDROphile]

Mojo: I am not discussing the propriety or consequences of the actions taken. The question was how to document what happened, not how to evaluate if anything is wrong or how to fix it. What happended was that the operations of the plan were suspended (rhymes with amended) and then restarted. A convenient and accurate way to record what happended is to create a plan document, called an amendment, to describe what happened and when (effective dates). That documentation is simply an objective discription of events. Nothing about documentation of fact suggest the the act of documentation makes what happend proper or without further consequence. If you and others want to explore and assist with the comliance issues that are implicit in what happened, go ahead. You suggested an inquiry into what might have been recorded that would constitute an amendment that properly and effecitvely changed the plan operations. Don't confuse trying to find evidence of proper actions that would avoid compliance issues (an amendment) with simply documenting what happened (an amendment). Amendment itself is neutral unless the amendment is inaccurate, such as backdating execution. Time, form, and substance of amendment are what determines compliance.

[MoJo]

Mojo: I am not discussing the propriety or consequences of the actions taken. The question was how to document what happened, not how to evaluate if anything is wrong or how to fix it. What happended was that the operations of the plan were suspended (rhymes with amended) and then restarted. A convenient and accurate way to record what happended is to create a plan document, called an amendment, to describe what happened and when (effective dates). That documentation is simply an objective discription of events. Nothing about documentation of fact suggest the the act of documentation makes what happend proper or without further consequence. If you and others want to explore and assist with the comliance issues that are implicit in what happened, go ahead. You suggested an inquiry into what might have been recorded that would constitute an amendment that properly and effecitvely changed the plan operations. Don't confuse trying to find evidence of proper actions that would avoid compliance issues (an amendment) with simply documenting what happened (an amendment). Amendment itself is neutral unless the amendment is inaccurate, such as backdating execution. Time, form, and substance of amendment are what determines compliance.

and I'm telling you that there is NO way to effectively document what happened that in fact would be appropriate. ANY documentation now created in fact becomes the noose which will hang the plan sponsor. I NEVER recommend that the client "put something in the file" without consider it's propriety, and it's effectiveness in correcting the situation - else it is what a lawyer (me included) would call an "admission against interest." Either fix it, or bury your head in the sand and hold your breath until the "audit lottery" risk is past (NOT what I ever recommend). The ONLY real fix is the missed opportunity correction going backwards, with a contemporaneous amendment to effect whatever the plan sponsor wants to have going forward.

Do it right, and get it fixed - but if you don't, at LEAST consult with an expert before you "paper the file" with ANYTHING that might come back to haunt you.

[Guest A_Dude]

KevIn C, I wish I knew more...I have asked for the details of the transaction etc. But, they have not answered the questions, and the owner wasn't happy when he found out the company he just brought had a retirement plan tp begin with. We had no idea of the sale until after it had happened....

[Kevin C]

We have a few clients that notify us in advance, but most don't think about telling us until after it's a done deal. Unfortunately, you can't help him until you know what kind of transaction it was. Good luck and let us know when you find out.

[GMK]

the owner wasn't happy when he found out the company he just brought had a retirement plan

Caveat emptor, eh? Looks like the application of an abbreviated form of 'due' diligence, sometimes called 'uno' diligence, from the Italian for oops.

Good luck, Dude.

[Guest A_Dude]

Well good news, turned out it was an asset sale...phew! More headaches await now though...they want to adopt the plan for the "new" division and then let the rest of company's employees join the plan at the start of next year. And, as stated before the purchasing company already has PS plan.

Headache number 1: Telling him that the "new" employees are going to be eligible for his plan once they meet eligibilty.

Headache number 2: Explaining that the plan will need to be tested for coverage of one group, and that all his current employees get past service credit if he adopts the "old" companies plan.

[Guest A_Dude]

Also wanted to say thank you to evryone for you help and insights! Greatly apprecciated!